Heat Waves Scorch Margins, Employees, Infrastructure: Business Risks of Extreme Heat

Heat waves are burning through parts of the U.S., Europe, and Asia, spurring significant business risks and slowed economic output. Regions of the eastern and southern U.S. are suffering under heat domes, with temperatures in Phoenix, Arizona, reaching nearly 120 degrees Fahrenheit this week. Several hikers in national parks died of heat-related complications, and in Europe, the heat wave has shuttered tourist sites like the Parthenon and sparked wildfires in Italy and Spain. As the globe continues to warm, scientists predict these episodes of extreme heat will become more common, increasing risk burdens to businesses and dragging down economic growth. Business leaders must consider new risks to their workers, equipment, and the infrastructure they rely on, while seeking new solutions, such as novel technologies and insurance.

Rising Temperatures and Risks

Rising heat is, predictably, among the most visible consequences of hastening global warming. In recent years, heat waves have increased in frequency and intensity, and with them risks to businesses and infrastructure. A 2021 report from Impax Asset Management Group found that two-thirds of large companies globally have at least one asset highly exposed to the physical risk of climate change; it’s likely the share of at-risk companies has grown since then. Such risks will have broader economic impacts: Recent studies have shown that extreme heat could cost the U.S. $100 billion annually from the productivity loss alone, while a Moody’s Analytics analysis estimates that chronic physical risk from heat stress could reduce worldwide GDP by up to 17.6% by 2100.

Heat risks range from the immediate to the less easily quantifiable. One of the most evident impacts is on human beings working in the immediate heat: Heat stroke is killing an ever-higher number of outdoor workers, and heat-related injuries are also on the rise. Researchers at Public Health England estimate that annual heat deaths in the UK will rise 257% by 2050, and a study in British Columbia found that heat-related workplace injuries requiring compensation increased by 180% year-over-year after a devastating 2021 heatwave. Beyond death or illness, heat impairs cognitive function and causes workers to move and think more slowly, reducing productivity and potentially leading to more mistakes or accidents. A study by the International Labour Organization projected that by 2030, the equivalent of more than 2% of total working hours worldwide would be lost every year, either because it is too hot to work or because workers have to work at a slower pace.

Beyond the human impact, heat can have significant impacts on materials, output, and infrastructure upon which businesses rely. High temperatures put increased stress on machinery, causing breakdown or requiring more frequent maintenance, and degrade materials or make them useless in the heat. Extreme temperatures, for example, can soften steel beams or make asphalt shingles used in construction prone to ripping or melting – not to mention scalding to the touch. In agriculture, extreme heat can kill crop outputs and even reduce milk and egg output from livestock. Heat is already wreaking havoc on American infrastructure, causing asphalt roads to buckle, delaying truck deliveries and plane takeoffs, and putting extreme stress on power grids. The North American Energy Reliability Corporation estimates that two-thirds of the continent is at risk of energy shortfalls this summer. Finally, heat shifts consumer behavior, driving customers away from outdoor restaurants and activities and tourists away from previously attractive summer destinations (Greece’s Parthenon was briefly closed this month after tourists queueing in the sun required medical attention). Efforts to stem these effects – such as investing in higher quality cooling systems or more heat-resilient materials, and pausing or delaying work to avoid the worst of the heat – can be expensive or impossible on time-based contracts.

Strategizing for Extreme Heat

Despite the difficulty of planning for or responding to extreme heat, business leaders have options available to them to shield themselves from the risks posed by extreme heat. One of these is the growing field of heat-related insurance. However, heat insurance is expensive, and may come to follow a growing trend wherein insurance for climate-related issues is becoming prohibitively expensive or even unavailable in the most affected areas. Nonetheless, some insurers are expanding to cover new areas of heat-related risks, such as crop failures due to weather, or insurance for dairy milk output affected by heat stress.

Businesses that operate in the heat are also following governments to build passive cooling into their built environments. Solutions range from new technologies like heat-absorbing road material to simple green spaces – all of which contribute to areas feeling cooler and less ambient heat in the surroundings. Finally, companies can utilize new technologies to incorporate heat risks into their business strategy. Some construction firms are using AI technologies to factor weather forecasts into their contract negotiations, building lost productivity as a result of extreme weather into their initial scope of work.

As always, rising heat risks will also create opportunities for some sectors of the market as the demand for new technologies appears and market behavior shifts. While damaging some sectors, extreme heat could be a boon to the tourist industries of historically cooler locales, as well as those that produce or utilize tech that gives them a leg up on competitors – like above-mentioned passive cooling strategies or increased automation to shift repetitive, heat-sensitive tasks away from human workers. As climate change progresses, heat (and other extreme weather events) will no longer be a cyclical, seasonal concern. Rather, weather will become a persistent threat in the business environment, and forward-looking businesses must make heat mitigation a permanent part of their strategy decisions.

*Anni Coonan is an analyst. She is not a licensed attorney.